Mortgages increase the risk faced by homeowners.

a. Explain how.

The mortgage is leverage for the homeowner, and leverage increase/reduces) risk.

b. What happens to the homeowners risk as the down payment on the house rises from 10 percent to 50 percent?

Instructions: Enter your responses rounded to one decimal place.

With a down payment of 10 percent, the leverage ratio is ____________

With a down payment of 50 percent, the leverage ratio is __________

A down payment of 50 percent ( reduces /increase ) the leverage ratio by a factor of _______ relative to a down payment of 10 percent. (Hint: Refer to the Tools of the Trade: The Impact of Leverage on Risk; Leverage ratio = cost of the investment / owner's contribution to the purchase)